Life phases and Asset Allocation Strategies

[DawgMan]

I'm to some degree piggy backing on my previous "Wrestling with bond allocation..." post, but thought it warranted a new thread. I have read a number of different philosophies on AA strategies employed by you all and as is obviuos, multiple factors play into these personalized strategies (i.e. Risk tolerance, available RE assets relative to target, any RE pensions relative to expenses, projected inheritance, legacy objectives). While 1 size does not fit all, after reading much from you all, here is where my logic for my own AA has taken me...

Financially, within 3 yrs of hitting FIRE with some lofty RE income projections based on wants, not required needs (currently 52). Not sure I will do it then, but it would be for primarily non-financial reasons if I kept working in some capacity. No backstop in my case (i.e. DW stay at home, no pension) so all my assets (401k, brokerage accts, income producing Real estate) will produce 100% of my RE income. I ratcheted down my AA from 80/20 to 70/30 to reduce some volatility in the last 2 yrs. My thought has been since I am still working and putting away $$ for the next 3 yrs, I can afford to keep some volatility. OTOH, I get the argument one should consider playing more defense as they get closer to FIRE, particularly if they have "won the game", and get even more conservative say 60/40. As someone who has been self employed most of my working life and accustomed/wired as a "hunter/gatherer", part of my struggle in leaving the accumulation phase to the draw down phase is this fear of giving up my comfort in generating income as my "backstop" and turning my financial future over to my assets. My instincts tell me I need to be/stay more aggressive with my AA to fill this void... a little whacky thinking, I know. Additionally, I suppose what affects this is the feeling of moving to a "fixed income" in RE whereas my income today can vary greatly above my expenses giving me significant margin to save significant $ or make more significant 1 time purchases. I know some of you are riding 95/5 AA all the way thru your RE while others have dropped to 50/50 or less. I guess my question is how did you reconcile your AA during the different phases of life and how did your own personal psyche/how you are wired affect how you adjust your AA despite the fact the math said you were good with perhaps something different/more conservative?

 

[LOL!]

It will probably sound strange, but the thing that helped me the most was to read several books on behavioral finance/economics such as "Thinking, Fast & Slow" and "Predictably Irrational" and "Why Smart People Make Big Money Mistakes" and "Your Money and Your Brain".

Those books got me more into rational probabilities and away from the "peace of mind" and "sleep well at night" and "mental accounting" behaviors that most people seem to fall into.

I now do not care if I lose money as much as I care about making money. Instead of losses being twice as painful as gains, I now pretty much expect to have short-term losses and shrug them off. So I am happy to have an asset allocation of about 60/40 going up to 75/25 at certain times. Those certain times are usually things like Brexit or earlier this year when markets were down 10% to 20%. That's because I think people are thinking unreasonably at those times and fear & gloom have accentuated their desire to stay out of markets.

Conversely, when euphoria sets in, then I tend to be more cautious.

So for me, I've rewired my brain and try to make money off of the behaviors of other market participants and do not worry about numbers so much. I think a good exampe of all this is that "How much cash …" thread.

 

[DawgMan]

I now do not care if I lose money as much as I care about making money.

I suppose this is closer to how I am wired and one reason I struggle with the "won the game" mentality. When you spend your whole life planning, growing, building something it feels anti-climatic sometimes once you get there, even though you accomplished the very thing you set out to accomplish. In my mind, to stop growing something (financial or otherwise) makes me feel like I am moving backwards. Perhaps some of this will take care of itself as i get closer to launching, but in the meantime, may check out your books... Thanks!

 

[DrRoy]

For much of my accumulation I had an equity AA in the low 80's%. I will RE in 4 months, and over the last couple years I have reduced equities to 62.4%, loosely on the way to a 60% target.

 

[W2R]

During the accumulation phase, my AA was 100% equities.

In my late 50's, three years before retirement, I started to gradually move to my present AA of 45:55, equities:fixed.

Nothing else to report!

I guess my question is how did you reconcile your AA during the different phases of life and how did your own personal psyche/how you are wired affect how you adjust your AA despite the fact the math said you were good with perhaps something different/more conservative?

I had almost nothing after a bad divorce at age 50. (Him either! Divorce is awful financially for all involved).

Anyway, the 100% equities was justified before I was FI because I didn't have much time left to save for retirement, and I was "putting all my chips on black". Either I'd make enough $$ to retire, or I wouldn't, but if I didn't take some risks I'd never get there. Psychologically? I am a total security junkie but I couldn't allow myself the luxury of indulging in that, at that time.

After I was FI and looking towards retirement soon, I felt more comfortable with a 45:55 AA which I felt was less risky and more conservative. So, that is where I have left it ever since.

 

[audreyh1]

During accumulation my allocation was almost 100% equities, mostly in company stock. About 2 years before retiring we sold some stock to pay off our house (not much) and started letting some cash savings build. It wasn't until within a year of retiring that I finally started transitioning to an asset allocation that included fixed income. Pretty risky, but we got lucky.

I took on a lot of market risk while working. Now I play it much safer.